Forbes: Understanding How Financial Advisors are Compensated

Wade Pfau, a professor at the American College of Financial Services, provides a brief summary on the different classifications of advisors and how they are compensated.

Job titles such as “financial advisor” or “financial planner” are not regulated. Anyone can use the terms without oversight of their qualifications, education, training or competency.

Financial planners or advisors generally fall into one of three main types: registered investment advisor, stock broker or insurance agent.

Brokers and insurance agents are generally treated as salespeople. They are required to use a “suitability” standard of care with their customers. This means that any recommended financial product must be “suitable” for the purchaser’s situation, but the recommendations do not necessarily need to serve the best interests of the purchaser.

Investment advisors are the only ones required to serve as “fiduciaries,” which requires them to act in the best interest of their clients and disclose any material conflicts of interest to their clients. “Fee-only” advisors are paid directly and only by their clients. They do not receive any commissions or other financial incentive for getting their clients into any particular investments.

Our Take

There is a need for much better transparency into how financial representatives are compensated for their services. In addition, there needs to be a much higher level of scrutiny placed on titles and the requirements necessary to use those titles.

Many individual investors do not fully understand the fees they are being charged (directly or indirectly through commissions or kickbacks) by their financial planner or advisor.

We believe financial planners or advisors should be required to act in their best interest of their clients and provide clients with a clear understanding of how (and how much) they are compensated for their services.

We are a registered investment advisor. We act in the best interest of our clients and believe strongly in fee transparency. See how we are different. Contact us today. We will share our fees and the questions you should ask your advisor about their fees.